SEBI Getting set to Regulate Index Providers

In News

• The government has squarely put the onus of regulating the practices of market index providers on the Securities Exchange Board of India (SEBI), amid concerns about the safety of passive investors’ savings parked in funds linked to indices that have added or retained several Adani group stocks.

• The Parliament has entrusted SEBI with protecting investor interests, so it must do whatever it takes to meet that mandate and is moving to regulate index providers.

What are market index providers?

• Index providers are companies that design and calculate indexes.
• They have the responsibility to set the rules that decide what securities to include in each index, how the index will be managed and how securities will be added or removed from that index over time.

Need for regulation

• SEBI had stressed the need for greater oversight on currently unregulated index providers like NSE Indices (a National Stock Exchange subsidiary) and the Asia Index Pvt. Ltd. (a BSE joint venture with Dow Jones), citing their growing dominance due to the “proliferation” of index funds.
• A draft regulatory framework for index providers mooted by the market watchdog in December had raised concerns about possible conflicts of interest that could arise in their governance. 
• These firms could “exercise discretion through changes in methodology resulting in exclusion or inclusion of a stock in the index or change in the weights of the constituent stocks” and their decisions can impact the volumes, liquidity and price of such stocks, as well as investors’ returns from index funds

Securities Exchange Board of India (SEBI)

• About:
  • SEBI is a statutory body established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
• Background:
  • Before SEBI came into existence, Controller of Capital Issues was the regulatory authority; it derived authority from the Capital Issues (Control) Act, 1947.
  • In April, 1988 the SEBI was constituted as the regulator of capital markets in India under a resolution of the Government of India.
  • Initially SEBI was a non statutory body without any statutory power.
  • It became autonomous and given statutory powers by SEBI Act 1992.
• Aim: 
  • To protect the interests of investors in securities and to promote the development of, and regulate the securities market.
  • It is the regulator of the securities and commodity market in India owned by the Government of India.
• Powers & Functions:
  • It is a quasi-legislative and quasi-judicial body which can draft regulations, conduct inquiries, pass rulings and impose penalties.
  • To protect the interests of Indian investors in the securities market.
  • To promote the development and hassle-free functioning of the securities market.
  • To regulate the business operations of the securities market.
  • To serve as a platform for portfolio managers, bankers, stockbrokers, investment advisers, merchant bankers, registrars, share transfer agents and other people.

Source: TH